Gifted house deposits
It’s a tough time for first-time house buyers. With rising property prices, saving up a decent deposit can feel like an uphill struggle. But what if your parents give you the money as a gift? Surprisingly, it’s not just a simple case of handing over the cash. Here’s what you should know about gifted house deposits.
It’s a tough time for first-time house buyers. With rising property prices, saving up a decent deposit can feel like an uphill struggle. But what if your parents give you the money as a gift? Surprisingly, it’s not just a simple case of handing over the cash. Here’s what you should know about gifted house deposits.
What is a gifted house deposit?
A gifted deposit is exactly that. It’s a genuine gift of money that’s been given to you unconditionally, with no strings attached. A gifted deposit is not a loan that you’ll be expected to pay back.
This needs to be made very clear, right from the start. If you’re given the money with a private agreement – no matter how informal – that you’ll pay it back to the person who gave it to you, it will be considered a loan. And that matters, because a loaned deposit will be treated differently by lenders, which could affect your chances of getting a mortgage.
Not only will you need to tell your mortgage lender and conveyancing solicitor that the deposit is a genuine gift, you’ll also need to show them proof.
Can anyone gift me the deposit?
This is another thing you need to think about. Some lenders are picky about who can gift you the money. In most cases, lenders are happy if it’s close family members, like your mum or dad, siblings or grandparents.
But if your favourite aunt or a generous friend wants to chip in, there’s a chance your lender might not accept the money as a deposit.
What proof do I need to show that the house deposit is a gift?
Luckily, it’s pretty simple to get proof that the gift is genuine. In most cases, a signed letter or document is enough to keep lenders happy.
The document needs to specify that the money is a genuine gift and doesn’t need to be paid back. It also needs to state that the person who is gifting you the money has no legal rights to the property.
It needs to be written, signed and dated by the person who’s gifting you the money, and should make clear the following:
- The money is a genuine gift.
- The amount of money being given as a gift.
- The gift is unconditional and is not to be repaid.
- The person giving you the money has no legal rights to the property.
- The address of the property you’re planning to buy.
- The gift comes from a legitimate source, for example, savings.
- The person giving you the money is financially stable and can afford to gift you the deposit.
You’ll also need a witness to sign and date the document.
The person gifting you the money will also need to prove their identity to the lender. Lenders may ask for:
- ID – for example, a passport or driving licence.
- Proof of address – such as utility bills or bank statements.
- A bank statement showing where the funds are coming from.
The conveyancing solicitor will also want to see these documents.
What is a ‘deed of trust’?
A deed of trust is a document that can be drawn up by your conveyancing solicitor. It helps protect the money that’s been gifted to you.
As is often the case these days, you might be buying your first home with a partner or even a friend. If the relationship goes sour and you split up, a deed of trust can protect your interests in relation to the gift deposit.
Let’s say your parents gift you the money to put towards your mortgage. A deed of trust can specify that the money has been gifted to you specifically, not to both you and your partner. If things go pear-shaped, at least you’ll know that the money you’ve put down is yours by rights.
Will I have to pay tax on the gifted deposit?
No, a gifted deposit is totally tax-free. But the estate of the person who gifted you the money might be liable to pay inheritance tax further down the road if they die within seven years of giving it to you and their total estate (including the gift) is worth more than £325,000.
What are the alternatives to a gifted house deposit?
If your parents don’t have the funds to gift you the deposit, there are alternatives:
- Your parents could be named as guarantors on a 100% mortgage. You won’t need a deposit, but your parents will have to guarantee to pay the mortgage repayments if you can’t.
- An offset mortgage that’s linked to your parents’ savings account will mean you pay less interest on your mortgage repayments.
- You might be eligible for the Government Help to Buy scheme, which helps first-time buyers get a foothold on the property ladder.
- Setting up a tax-free Lifetime ISA can help you save for a deposit quicker. When you save into a Lifetime ISA (LISA), the Government adds a 25% bonus up to a maximum of £1,000 each tax year.
If you’re lucky enough to have generous parents with a healthy bank balance, a gifted deposit is certainly one of the simplest ways to get the funds together. A decent chunk of money to use as a deposit will also give you access to a wider choice of mortgages. Once you’re ready to take the leap, check out which mortgage deals are available to you.
| Did you know? The Mortgage Guarantee Scheme, launched in April 2021, was set up by the government to encourage more lenders to re-introduce their 95% LTV mortgages by supporting them with a government-backed guarantee. The economic uncertainty caused by the COVID-19 pandemic had led many mortgage lenders to withdraw their 95% mortgage deals. |
Frequently asked questions
How much money would I need for a house deposit?
Recently, lenders had asked for a 10% minimum deposit. But thanks to the Mortgage Guarantee Scheme, 5% is becoming more acceptable to lenders – whether they participate in the scheme or not. That means you’ll have 5% equity in your home and the remaining 95% will be your mortgage. So, if you buy a house for £250,000 and your parents give you the 5% deposit, they would need to gift you £12,500.
The bigger your deposit, the smaller your mortgage loan will be. A bigger deposit also gives you better access to lower interest rates, which means lower monthly payments.
What does loan to value mean?
When you start looking for a mortgage, you’ll see LTV shown as a percentage on mortgage lenders’ advertisements. Loan to value is just a fancy way of showing what percentage you’d need to borrow in relation to the value of the property you’re buying. So, if you buy a house for £250,000 and your deposit is 10% (£25,000), your LTV will be 90%. In other words, you’ll need to take out a mortgage for £225,000.
The bigger your deposit, the lower your LTV will be. Lenders tend to offer better interest rates to customers with a lower LTV. This is because there’s more equity in the property, so it’s less of a risk for them – if you default on your mortgage payments and your lender repossesses your home, there’s more money for them to help recover their losses.
Remember, you home could be repossessed if you don’t keep up with repayments on your mortgage.
What if my parents want to lend me the deposit instead?
If you’d prefer to pay your parents back, they could lend you the money instead. It’s best to set up a formal loan arrangement via a solicitor. You’d also have to tell your mortgage lender that it’s a loan, not a gift. Just be aware that a loan, even from family members, will be considered a debt, and may limit the number of mortgage deals available to you.
Mortgage lenders tend to frown upon borrowing money for a mortgage deposit. They will only usually accept deposits from a non-repayable source, like a gift. This is because they’d be worried about your ability to pay back the loan as well as your mortgage.
Would a gift of money from someone else be counted as a gifted deposit?
If you’re lucky enough to receive a gift of money from a non-immediate family member or friend, you may not be able to use it directly as a gifted deposit. However, you can receive up to £3,000 a year without it being liable for tax. This is known as your annual exemption. You could put it in a savings account and use it to help build up enough for a deposit over several years. That way you wouldn’t have to declare it as a gifted deposit to your mortgage lender as it would be considered money from your own savings.
